Forrester Research, Inc. — Q1 2017 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Forrester sells subscription-based research, Connect and Data products, advisory and consulting services, and events. Most subscription contracts are typically annual and paid in advance.
Financial results and liquidity
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $77.2 | $77.4; essentially flat |
| Research services revenue | $51.7 | $53.2; down 3% |
| Advisory services and events revenue | $25.5 | $24.2; up 5% |
| Operating income / margin | $3.1 / 4.1% | $2.7 / 3.5% |
| Net income / diluted EPS | $3.0 / $0.16 | $1.3 / $0.07 |
| Operating cash flow | $19.5 | $21.6 |
| Cash and cash equivalents | $74.2 | $77.0 at Dec. 31, 2016 |
| Marketable investments | $60.4 | $61.1 at Dec. 31, 2016 |
| Total liabilities | $194.6 | $185.7 at Dec. 31, 2016 |
- Cost of services, selling and marketing, and general and administrative expenses were $31.4 million, $30.6 million, and $10.2 million, respectively. Operating expenses included no reorganization costs in Q1 2017, compared with $1.0 million in Q1 2016.
- Net income benefited from a $1.3 million tax-audit settlement benefit; the quarter recorded an income tax benefit of $0.1 million versus tax expense of $1.1 million a year earlier. Management expects a 2017 effective tax rate of approximately 36%.
- Investing activities used $0.7 million. Financing activities used $22.2 million, including $21.5 million of share repurchases and $3.5 million of dividends, partly offset by $2.7 million of employee-plan stock proceeds. Cash decreased $2.8 million during the quarter.
- Deferred revenue was $156.3 million at March 31, up 1% year over year. The company reported no debt balance in the supplied financial statements and said it had no line of credit.
Material changes and operating trends
- Research revenue declined, mainly due to lower electronic reprint revenue and weaker Data product demand. Advisory and consulting revenue increased; events revenue was insignificant because no events were held in either comparable quarter.
- Revenue from customers outside the U.S. was $16.8 million, down 6% reported and down 3% after adjusting for foreign currency. Declines in Asia Pacific and Europe were partly offset by Canadian growth.
- Key commercial metrics weakened year over year: agreement value fell 2% to $236.6 million; client retention was 74% versus 77%; dollar retention was 87% versus 88%; enrichment was 94% versus 97%; and client count declined 2% to 2,427. Management said client retention had declined sequentially since its recent high in Q3 2015.
- Project Consulting segment revenue grew 12%, with growth attributed primarily to content marketing and projects delivered from backlog. Product segment revenue declined 3%; Research segment revenue increased 1%. Segment reporting was revised, and prior-year segment figures were reclassified to match the current presentation.
- The company repurchased approximately 567,000 shares for $21.5 million. Remaining repurchase authorization was approximately $38.6 million. Q1 dividends were $0.19 per share, versus $0.18 a year earlier.
Outlook, risks and other disclosures
- Management expects the sales force to increase 7%–10% in 2017, subject to the business environment. It expects Project Consulting revenue growth to moderate to a single-digit rate in Q2.
- Management believes cash, marketable investments and operating cash flows will cover working capital, financing activities and capital expenditures for the next 12 months. Of the $134.6 million in cash and marketable investments, $49.6 million was held outside the U.S.; repatriating those funds for U.S. operations could require U.S. taxes. The company stated its intent to permanently reinvest them abroad.
- The filing identifies risks including retention and renewal of memberships, consulting demand, customer engagement changes, technology spending, international operations, competition, hiring and retention, cybersecurity, privacy compliance, taxes, and fluctuations in quarterly results. It refers investors to the 2016 Form 10-K for the full risk-factor discussion.
- The company adopted stock-compensation guidance and early adopted intra-entity asset-transfer tax guidance on January 1, 2017, recording cumulative retained-earnings adjustments of +$0.2 million and -$0.5 million, respectively. Management expects the new revenue-recognition standard to have no material impact, but adoption analysis was ongoing. The lease standard, effective for the company in 2019, is expected to materially affect financial position.
- Management reported disclosure controls were effective as of March 31, 2017, with no material change in internal control over financial reporting during the quarter. No material changes to contractual obligations or market-risk assessment were reported; the company reported no off-balance-sheet financing arrangements.
Important facts for investors to verify
- Whether the year-over-year deterioration in client retention, dollar retention, enrichment and client count continues, and whether it affects agreement value and subscription revenue.
- Whether research and Data product demand improves, and whether Q2 Project Consulting growth moderates as management expects.
- The drivers and recurrence of the Q1 tax-audit benefit, and the actual full-year effective tax rate versus the approximately 36% estimate.
- The pace of future repurchases and dividends, remaining authorization, and the effect of capital returns on cash balances.
- Foreign-currency exposure and the practical availability and tax cost of the $49.6 million held outside the U.S.; also monitor adoption of revenue-recognition and lease accounting standards.